The GERM Report

The Geopolitical Energy and Risk Monitoring Report

Risk level: RED

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

• Ask the right questions and don’t panic.
• $60/bbl Brent seems like a dream.

The liberal world order is unraveling and the global economy is faltering. National leaders are taking draconian measures to ensure social distancing, a term we did not have in February. At home, everything from running clubs to church services have been cancelled and we’re left marveling at the changing times from our computers at home and not at the office. When trying to assess this new order, describing the issue in appropriate terms is as important as trying to find solutions. But to do this, an observer needs to determine the problem from either the systemic, the subsystemic or the environmental level. When assessing the Darwinian economic fallout from the coronavirus outbreak, we as researchers are confronted with a level of analysis problem.

This is brand new turf. The price for Brent crude oil crashed some 24% last week and $60 per barrel seems like a fading dream from a bygone era of economic vitality. In his daily newsletter, Phil Flynn at the Price Futures Group in Chicago said that “Crazy volatility will keep us on edge.” Hold on to your seats, folks, because things are about to get weird.

Economic malaise was setting in by the fourth quarter, though monetary policy makers had been able to use the lessons learned from the Great Recession to keep things moving. The United States was in the midst of a decade-long expansion, propped up by a stimulus package unveiled in the early days of the Trump administration. Herbert Stein, the chairman of the US Council of Economic Advisers under Presidents Nixon and Ford observed that if “something cannot go on forever, it will stop.” Perhaps that maxim explains the phenomenal market crash triggered by the coronavirus. Economic expansion cannot go on forever, so by Stein’s law, it must stop.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the US Federal Reserve stated Sunday. “Global financial conditions have also been significantly affected.”

Pioneered in part in his seminal “Man, the State and War,” the neorealist thinker Kenneth Waltz advocated an approach to examining issues using various images. If we examine the system from an upper-level image, the system level, we examine the totality of the situation without getting lost in cults of personality. The opposite is true if our image is one of identities and how they’re shaped by external events. Using this image means the concern is how we talk about things, not how they talk about things. In addressing the impacts of the coronavirus, researchers should be careful with where on this spectrum they’re looking.

At the local level, there is a sense of surreal concern. Leaders in areas with growing levels of confirmed infections are closing down shop. But to those in areas with fewer cases, the situation may still seem like a foreign event. How we talk about the coronavirus in our local communities depends on who “we” are. Are we elderly? First responders? Those identities determine our behaviors and subsequently the impact on local economies. Can we still go to the bar? Can we still go to work? At this level of analysis, we must take a bubble-up approach to economics. If local businesses fail, local workers can’t spend. If they can’t spend, local investments suffer and so too do plans for the things that prop up future employment. Here, local workers, isolated from their shopping malls and big chain retailers, are getting a de facto stimulus in the form of cheap gasoline and may be taking to feel-good purchases online in the form of books and lipstick. At this level, there is no one to blame.

At the national level, things look a bit different. Maintaining, correctly, that the current situation is temporary, Russia for now insists there is no need for a voluntary quarantine from the oil market. With no coordinated agreement on what to do, parties to the OPEC+ constraint agreement are now free to take whatever steps necessary to ensure a healthy market share. The situation here only adds to the problems from the lingering nationalist trade tendencies of President Trump in the Sino-American trade war. More supply plus low demand means low prices, and economies that depend heavily on oil for revenue are taking a hit. At this level, the economic impact is trickle-down. Companies such as Chevron were already trimming payrolls and drillers may be cutting back as the lag-effect of demand destruction starts to emerge. At this level, blame is easy to assign and may only embolden the nationalist and xenophobic tendencies that emerged as the liberal world order started to unravel.

At the international level, the image is of state actors moving through anarchy, where each player is concerned first and foremost about survival. Here, nationalist tendencies are easily explained as a type of self-quarantine. Price wars too are explained away as consequences of a changing system. In an era where multiple layers of connectivity are falling out of fashion, the appetite for coordination diminishes. Nation-states are literally retreating into isolation, trade lanes are slowing and a new world order may seem likely. But who, or what, is to blame? It’s easy to politicize the issue at hand as the result of partisan malfeasance, but that’s not a systemic issue. If Stein’s Law is true, then the global system characterized by widespread, deep and multiple layers of connectivity may be ending. Or it may be that the temporary period of isolation is over and the liberal world order will re-emerge in a stronger form.

“While quarantining and social distancing is the right prescription to combat COVID-19’s public health impact, the exact opposite is needed when it comes to securing the global economy,” wrote IMF Director Kristalina Georgieva on Monday. “Constant contact and close coordination are the best medicine to ensure that the economic pain inflicted by the virus is relatively short-lived.”

There may be signs of economic hope coming out of China as outbreak numbers diminish. After the US Fed slashed rates, however, it will be a bumpy ride for crude oil. Brent had been threatening to fall into the $20s for most of Monday morning. Before trading began on Wall Street, the US Empire Manufacturing index showed signs of collapse. We’ll get a better idea of how bad the economy was before this mess began when Japan releases data on industrial production for January on Tuesday. Don’t expect any good news on Wednesday when the Europeans report on economic sentiment for March. Consumer behavior this week may be telling so pay attention to the flush of spending data from North America on Friday. It should go without saying that a 4% price movement for oil this week is likely, so we are in Red alert territory for the foreseeable future.